National Provident Fund Final Report [Part 41]
Below is the forty-first part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.
NPF Final Report
This is the 41st extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.
Executive Summary Schedule 4E Continued
NPF management did not take any independent, professional investment advice before moving quickly to acquire a placement of 2,000,000 shares with 1,333,333 free options at 20 cents a share for $A400,000. NPF purchased its first two million shares in December 1995 when Macmin’s share price and the gold price were near highest peak, as shown by the following graphs.
Gold Price See Graph One – Source: Bank of PNG Quarterly Economic Bulletin
Macmin Share Price See graph two – Source: ASX (Commission Document 754)
Investment Appraisal And Board Approval
This was an early example of NPF’s new investment strategy as formulated on June 15, 1994. The strategy was to diversify from a passive investment approach to a more active and hence more risky approach. A competent expert analysis of this investment would have shown several risks associated with it including:
- Share market fluctuations;
- Exploration and production risks;
- Environmental risks;
- Finance risks – the company was not able to raise sufficient capital to undertake projects;
- Government actions;
- Gold price – risks that the price of gold would fall and render mine or exploration programs economically non-viable;
- Foreign exchange rate fluctuations;
- Risks in PNG including:
– Changes in Government policy or legislation, unfavourable to the enterprise;
– Civil unrest;
– Landowners’ issues;
– Licence cancellation;
– General economic situation and o Foreign exchange and taxation.
NPF’s own investment policy (June 15, 1994) required consideration of the following:
- The impact of the investment in Macmin on the investment portfolio balance and the investment guidelines;
- A financial evaluation of Macmin;
- A critical assessment of Macmin’s business risks;
- An assessment of Macmin’s management’s capabilities, qualifications, background and an assessment of the directors’ business experience and acumen;
- The likely investment returns measured against the associated risks of the investment; and
- Future funding requirements of Macmin and the ability of Macmin to raise funds to fulfil those requirements.
Clearly, an investment in Macmin was a speculative investment. Therefore, these issues should have been considered in relation to NPF’s objectives and the existing structure of its investment portfolio.
The NPF management and board must have completely disregarded this investment policy because the Macmin investment failed each of those criteria.
In not providing proper investment advice, NPF management was in breach of its duty to the board. The trustees, in not insisting upon such advice and in not performing any valid investment analysis, failed to fulfil their fiduciary duty to members of the fund. Throughout 1995 and 1996 and up until May 1997, NPF continued to invest in Macmin despite the alarming fall in its share price. During this period, management frequently made acquisitions without board approval and frequently failed to provide accurate and timely information to the board about what was happening.
NPF’s Board Failure To Monitor Management Activities
For its part, the Board of Trustees continually failed to keep itself informed about management’s activities and failed to criticise or reprimand management when it became aware of unauthorised transactions.
The trustees seemed not to have realised that the falling share prices, which were causing unrealised losses of several million Australian dollars, made it imperative for them to review the future of the Macmin investment. Instead, they docilely allowed themselves to be led, by Mr Copland and management into further acquisitions until the end of 1997.
NPF held almost 20 per cent of Macmin’s issued capital and was, quite inappropriately, demanding a second seat on the Macmin board.
Board Approval Of Acquisition Of Additional Shares And Loans To Macmin
In July 1996, in another Macmin share placement, NPF acquired an additional 10 million Macmin shares for $A2.4 million. This was first approved by an invalid circular resolution on May 21, 1996, and the board also resolved to lend $A3 million to Macmin. These approvals were given by the board with no expert advice, in the face of Macmin’s falling fortunes and share price and despite the fact that security for the proposed loan was potently inadequate to protect the interest of the members of the fund.
While negotiations on the details of the security for the $A3 million loan were still being discussed, the NPF board approved yet another (short -term) loan of $A1 million on consideration of the same security arrangements which was depended upon the issue of additional shares in the ailing Macmin to NPF, should Macmin default on its loan commitments.
These security arrangements were being negotiated and agreed to by David Copland who was exceeding his authority as chairman of the NPF board in these endeavours. As a result of further adverse reports about Macmin in February 1997, these loans did not proceed.
“On Market” Purchase Of Shares By NPF
Also in the period November 29, 1996 to December 24, 1996, NPF purchased “on market”, 2,530,000 shares for $A452,570 increasing NPF’s shareholding to 16.56 per cent of issued share capital. Once again this was authorised by management without due diligence or expert appraisal and without the knowledge or approval of the NPF board. The management and trustees both failed in their duties to NPF and its members regarding these “on market” purchases.
During 1997, NPF continued these “on market purchases’, usually without explicit board approval, bringing its shareholding in Macmin close to 20 per cent.
NPF’s investment in Macmin, during 1997, was as follows:
The trustees were rarely consulted or given prior knowledge of these purchases. Sometimes management did not include the investment schedule, which would have disclosed the transactions in the papers for the next board meeting, so the trustees had no notice at all.
Board’s Failure To Reprimand Management
It is disturbing that the trustees did not speak out about management’s failure to provide documentation or about the unapproved transactions authorised by Mr Wright and Mr Kaul. Even on the occasions when these activities were belatedly brought to the board’s attention, it did not result in criticism or reprimand. For this, the trustees must bear responsibility, as their failure must have encouraged management to persist in this improper way.
25 Million Share Placement, March 1997
On March 20, 1997, Macmin issued a prospectus for the issue of 25 million shares at 20 cents a share, with one option per share. With no objective review of the proposal and heedless of it being well outside NPF’s investment guidelines, NPF purchased 4,297,409 shares with an equal number of options for $A644,611.
In recommending this purchase to the board, Mr Kaul falsely implied that Macmin’s explorations were going well, despite reports in his possession to the contrary. He also implied that Macmin’s share price was approximately 8 cents, which was higher than the actual price of 6.5 cents.
NPF failed to obtain the Ministerial approval required under s.61(2) Public Finances (Management) Act (PF(M) Act).
Mr Kaul and Mr Wright and all the trustees were again failed in their duty and fiduciary duty to the board and members of the fund in recklessly entering into this extra purchase.
The shares were paid for by using off-shore funds in NPF’s account with its brokers, Wilson HTM. This deliberate breach of the (BPNG) foreign exchange regulations, which was authorised by M. Wright, was improper and illegal. The commission recommends that Mr Wright and Mr Kaul be referred to the Controller of Foreign Exchange, BPNG to consider taking action under the appropriate regulations.
TO BE CONTINUED